Resetting the Gaming Industry

Video games have evolved beyond entertainment to become a comprehensive platform

By Guo Xixian

The 2022 China Game Industry Annual Conference was held from February 12 to 14, 2023, in Guangzhou, Guangdong Province. After three years of developers being isolated from their users due to COVID-19, in-person attendance at the beginning of this year made the event highly significant for Chinese developers and publishers alike.

The recovery of the gaming industry will likely involve resumption of issuance of version numbers, normalization of anti-addiction supervision, and emphasis on the technology and culture behind the games.

The 2022 China Game Industry Annual Conference is held from February 12 to 14, 2023 in Guangzhou, Guangdong Province.

Shrinking Revenue

A report by world-leading video game data provider Newzoo showed the total revenue of the global gaming market in 2022 at US$184.4 billion, down 4.3 percent year on year. The sluggish market amid economic headwinds caused widespread concern about the outlook for China’s gaming sector in 2023.

China’s gaming market generated combined sales of 265.88 billion yuan (US$38.5 billion) last year, down 10.33 percent from 2021, with the number of gamers slipping 0.33 percent to 664 million, according to the China Gaming Industry Report 2022 published by the Gaming Publishing Committee of the China Audio-Video and Digital Publishing Association (CADPA), the country’s semi-official gaming industry association.

The report attributed the decline in game sales revenue to an unstable business environment at home and abroad, diminishing user enthusiasm and purchasing power, negative market expectations, and few new games. Chinese game companies were accumulating strength in 2022 despite downward pressure, the report said, declaring that after years of development, the domestic market has shown the ability to withstand adverse impacts to a certain extent.

Following a significant slowdown in 2021, China’s video games industry suffered its first decline since 2014, which suggested a saturated domestic gaming market, said CADPA Vice Chairman Zhang Yijun.

The COVID-19 pandemic exerted a varied impact on different sectors and industries, and the gaming industry was not very badly affected. U.S.-based market research firm NPD Group reported that game sales in the country remained largely unchanged after the stay-at-home order was removed in May 2020. The Ministry of Economy, Trade, and Industry of Japan monitored a significant increase in video game activity after the COVID-19 outbreak in 2020 but concluded that the improved performance had little to do with changes in containment measures.

Multiple Chinese securities firms came to similar conclusions. According to Northeast Securities, the impact of macroeconomic policies on the gaming industry was minimal in the medium and long term, and they identified a major factor causing the market downturn as a shortage of supply of new games. Chinese developers have managed to counter the external influence on market demand to find renewed hope for recovery. Guosen Securities considers the situation in China different from the overseas market. Sluggish customer demand is forecast to continue in 2023 while growth in the Chinese gaming sector will be boosted by an increase in product supply.

Wang Zhaojun, vice president of the China Electronics Metaverse Technology (Luzhou) Company, said that given the unfavorable economic environment in recent years, market concerns are understandable, but cautioned that the general outlook for the gaming industry needs to be considered from a longer-term perspective as well as from multiple aspects such as changes in regulatory policy and market supply.

The Game Approval Issue

In May 2016, the Chinese government issued a new regulation on video game publishing, requiring game developers and publishers to apply for a license before launching a new product. Getting games approved has since become a top priority for gaming companies.

The game approval process, however, had been somewhat irregular over the past two years. Issuance of publishing licenses for home-grown games was suspended in August 2021 and resumed in April 2022, followed by temporary halts in May and October, respectively. Annual data showed a total of 512 games were licensed in 2022, down 32.2 percent from 2021 and 63.6 percent from 2020.

The game license freeze exerted a measurable impact on the gaming sector. According to corporate information platform Tianyancha, some 18,000 game-related businesses deregistered in 2020 and another 14,000 such firms shut down within five months after the August 2021 approval interruption. Most were small and medium-sized enterprises, and those who lived through the harsh times were left few options but to survive by retooling their existing games.

Good news came in early 2023, when 175 new games were licensed in January and February. The newly-issued approvals in the first two months this year accounted for nearly 30 percent of 2022’s total. Signs of a resumed and consistent game licensing process are expected to increase the supply of new games on the market.

A spokesperson from a Chinese gaming giant told China Report ASEAN that many new games in various types have gained publishing licenses since the end of 2022, which was warmly welcomed by the industry and helped boost market confidence. Yet she cautioned gaming firms against future uncertainty and suggested paying close attention to potential changes in government policy.

Wang Zhaojun opined that the new policy on game publishing is aimed at regulating the gaming market and encouraging developers and publishers to focus more on home-grown products. He believes that licensing should play a positive role in nurturing high-quality games.

Anti-Addiction Efforts

Since they have been around, video games have been targeted for distracting people from more meaningful matters. Parents complain that their kids spend so much time on games that their daily lives and mental health are adversely impacted. Addiction to video games is also considered a source of social problems. In response to the widespread concern, the Chinese government implemented a series of regulatory measures to prevent minors from becoming addicted to video games.

In May 2000, an article published by the Chinese newspaper Guangming Daily described computer games as “electronic heroin” and examined a worrying phenomenon of young students lingering long over arcade games and even abandoning their studies. A government campaign was launched the following month to remove arcade machines from commercial game rooms, which marked the start of a 13-year ban on recreational gaming machines.

Starting July 2007, video games in China were required to be equipped with an anti-addiction system, which was followed by a package of regulatory policies covering game content, real-name registration, age-appropriate warnings, and gaming industry controls.

An article published by Economic Information Daily on August 3, 2021, echoed the same sentiments, calling online gaming “spiritual opium” that was harming Chinese teenagers. Although the article was soon deleted amid continuing controversy, it caused a slump in the shares of major Chinese gaming companies. Many industry insiders said the biased report neglected the benefits of video games.

The same month the controversial article was published, China’s National Press and Publication Administration introduced rules that specified games operators were only allowed to provide services to players under the age of 18 for one single hour time slot, between 8 p.m. and 9 p.m., on Fridays, weekends and public holidays, which was considered the severest anti-addiction restrictions.

The anti-addiction restrictions have an impact on the revenue of the industry but not significant because the main target group for most online games are adults, according to industry insider Mr. Yang, who pointed to market expectations for the deciding factor.

Fourth quarter 2020 earnings for Chinese gaming giant Tencent showed that 6 percent of game sales were generated from users under the age of 18 and just 3.2 percent from users under 16. Solutions from gaming firms have proved effective at reducing teenagers’ playing time, but governmental measures to stop online game addiction are likely to continue even as confidence in the Chinese gaming market returns.

In November 2022, the CADPA Gaming Publishing Committee issued a report on the progress of anti-addiction efforts in the gaming sector for minor protection and stated that the gaming addiction problem among younger players was basically resolved. According to the report, since the restrictive policies were introduced, juveniles’ total playing time and expenses on video games have both been significantly reduced.

Excessive gaming among children, however, is not the only problem concerning the parents. Short videos, among other means of entertainment, have increasingly become a new source of distraction leading to not only time wasting but also a higher myopia rate among youngsters.

Wang Zhaojun believes that the positive aspect of video games should be recognized and that good games can be a form of both entertainment and education. Minor protection demands a systematic approach. Government action represents only the first step, and concerted efforts by families, schools, and other social sectors are also required.

Beyond Entertainment

In November 2022, European Parliament adopted a resolution on esports and video games. The first such document approved by the European Union, the resolution called for acknowledgement of the value of the video game ecosystem as a major cultural and creative industry with strong potential for further growth and innovation.

An opinion piece published by Chinese state media outlet shortly after the resolution argued that video games had evolved beyond just a form of entertainment and that the role of the gaming industry in promoting industrial transformation and technological advancement needs to be appreciated and strengthened.

Rapid development of the digital economy has led to gaming technology being utilized in various fields such as transportation, manufacturing, and healthcare. A report jointly released by the CADPA Gaming Publishing Committee and the China Game Industry Research Institute showed that in the past six months, 62 percent of interviewees recognized the role of gaming technology in fostering technological innovation while 91.4 percent considered gaming technology a driving force in the real economy.

CADPA Deputy Secretary-General Tang Jiajun suggested challenging common stereotypes about video games. He called for a new understanding of the gaming industry from broader perspectives and collaborative efforts to unleash the potential of the gaming sector to facilitate higher-quality development.

By blending elements of traditional culture into their products, Chinese game developers have achieved commercial success in overseas market while contributing to the promotion of Chinese culture. For example, with the help of digital technology, the giant Lusana Buddha in Longmen Grottoes, a UNESCO World Heritage site, was reconstructed in NetEase’s A Chinese Ghost Story Online. When a song by Yunjin, a character in miHoYo’s Genshin Impact, was released, it soon went viral and sparked growing enthusiasm for traditional Chinese opera outside China.

Yang Fang, deputy director of the Publishing Bureau of the Publicity Department of the Central Committee of the Communist Party of China, said that a government plan will be implemented this year to spread the positive influence of online games among players and encourage game firms to contribute to technological progress. The new plan also aims to foster more high-quality games that meet the cultural needs of the public and boost the mental strength of the Chinese people.

Video games have developed into a comprehensive platform demonstrating technological, artistic, cultural and commercial value, according to Wang Zhaojun. He recommended game companies stay cautiously optimistic about the outlook of the gaming industry and focus more on product quality and customer experience with their feet on the ground.

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